Upping Target Price for Income Pick Hi-Crush on Rising Demand for Fracking Sand

Given the fact that demand for fracking sand continues to rise, MoneyShow's Jim Jubak thinks the units of this MLP still have upside, so he's raising his target price as of today, June 24.

Hi-Crush Partners (HCLP) has crashed through my target price of $52 a unit by climbing 20.3% since I added the master limited partnership to my Dividend Income Portfolio on May 23. But, with demand for fracking sand still climbing—thanks to new technologies that use more sand in an effort to increase production of natural gas and liquids from wells in shale geologies—I think the units still have upside here. As of today, July 24, I'm raising my target price on Hi-Crush partners to $65 a unit.

You can see the increasing demand for the company's high quality Wisconsin Northern White sand for fracking in the agreement that Hi-Crush just signed with Halliburton (HAL) on June 23. The new deal, which replaces an existing agreement, extends the life of the deal through 2018 and increases the minimum annual volume that Halliburton will buy from Hi-Crush.

The deal is a reflection of increased demand for fracking sand as oil and natural gas producers try to cut costs and yet increase output from wells in shale geologies, such as the Bakken and Marcellus. For example, drilling companies have discovered that pumping twice as much sand into a well—in an effort to crack open passages that free the natural gas and liquids trapped in the shale—can double a well's output. Doubling the sand pumped into a well to eight million pounds from a more typical four million pounds can add $600,000 to the cost of a well, but can also double the output from a well. For a while, 11 million pounds per well seemed like a top. But, in May, Rice Energy pumped 28 million pounds of sand into a Utica shale well in Ohio. The well started off with an initial production of 41 million cubic feet of natural gas a day, a record for a well in shale.

Volumes are also rising as drillers space wells more closely together and drill more wells off a single pad. Spacing is dropping as drillers experiment with how to increase production and cut costs. Putting more wells on a single drilling pad cuts costs per well and also decreases spacing.

And finally, sand volumes are also rising as the gradual increase in natural gas prices leads companies to increase drilling activity in new fields such as the Marcellus and Utica geologies. Demand for fracking sand in the Marcellus, for example, will go to 13 billion pounds in 2014 from 9.6 billion pounds in 2013, according to PacWest Consulting Partners. PacWest projects that demand will climb to 15.8 billion pounds in 2015.

The only drawback to the big gain in the price of Hi-Crush units is that the speed of the gain has outrun increases in payout. Hi-Crush did increase distributions to a quarterly rate of 52.5 cents a unit with the most recent payout (record date was May 1). That's a big step up from the quarterly 47.5 cents a year earlier, but the gain in the price of the units still means that the yield has fallen to 3.6%.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.